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Trusteeship and the Underlying Company - Part I: The Relationship

Introduction

The relationship between the professional trustee and the underlying company can be rather complex and therefore two articles dealing with different components of this common offshore structure have been prepared. Part I will seek to generally outline and consider the duties, obligations and possible liabilities of the professional trustee in respect of an underlying company of a trust whereas Part II will focus on the role of a director of an underlying company and the UK shadow director provisions.

For the purposes of the two articles an underlying company shall mean any company incorporated by the professional trustee and/or any company of which the trustee holds the majority or entirety of the shares.

From a Jersey perspective the relationship between the professional trustee and the underlying company has not been considered in any detail by the Jersey court for a number of years and therefore any previously accepted guidance may be outdated. Should this article raise any queries or doubts then professional advice should be sought.

The current case law position

It is an everyday practice in offshore jurisdictions for an offshore trust to be established which will hold the majority, or in many cases the entirety, of the shares of a company (which can be either offshore or onshore) for the benefit of the beneficiaries of the trust. As Brightman J noted in Bartlett v Barclays Bank Trust Co Ltd [1980], the foremost quotedEnglish case on this issue, “….the question [is], what [is] the duty of the [trustee] as the holder of the shares?” (the square brackets are additions or amendments for the purposes of convenience). Brightman J answered his own question and in summary he stated that the trustee must not allow the underlying company to act in isolation according to its own strategy, but must be proactive and take “appropriate action” as “a prudent man of business” would to “safeguard his investment”, such as regularly obtaining information to understand the business and the commercial goings-on of the underlying company. In addition, the trustee must take it upon itself to periodically review and enquire as to how the business is being conducted. One way to do this is to appoint either an employee or a nominee of the professional trust company as a director who will report back, as and when required. This was considered by Cross J in the case of Re Lucking’s Will Trust [1968] to be “such a way as an ordinary prudent man would conduct a business of his own”.

However, it would not seem to be necessary in every case for the professional trustee to appoint a director to the Board. Depending on the individual circumstances of the matter, and the investment strategy, it may be ‘prudent’ (i.e. sufficient) to merely insist on receipt, in a timely manner, of copies of the company’s agenda, minutes and accounts together with the arrangement of regular review meetings with the directors. This may provide adequate information in order to satisfactorily make an informed decision as to whether or not the trustee should consider interfering with the conduct of the business of the underlying company in order to protect the interests of the beneficiaries.

As a general guide though, should the professional trustee hold more than 51% of the shares of the underlying company, then prima facie there is a very convincing case for insisting upon the appointment of a director to the Board in order to protect and represent the interests of the beneficiaries.

The current Jersey law position

The duties of a Jersey trustee are set out at Article 21 of the Trusts (Jersey) Law 1984, as amended (the “Law”). In respect of this discussion the most germane parts are as follows:

"Duties of trustee

(1) A trustee shall in the execution of his or her duties and in the exercise of his or her powers and discretions -

(a) act -

(i) with due diligence,

(ii) as would a prudent person,

(iii) to the best of the trustee’s ability and skill; and

(b) observe the utmost good faith.

(2) ................................

(3) Subject to the terms of the trust, a trustee shall -

(a) so far as is reasonable preserve the value of the trust property;

(b) so far as is reasonable enhance the value of the trust property."

Article 21(1) therefore reinforces the case law position by clearly stating that the trustee must act “as would a prudent person”, a duty which is not capable of exclusion or limitation because it is not prefaced by the words “subject to the terms of the trust”. By contrast, the duties under Article 21(3) to reasonably preserve and enhance the value of the trust property are stated to be “subject to the terms of the trust”.

The value of the shares in an underlying company will, of course, affect the value of the trust fund from which the beneficiaries may benefit. Is it therefore the responsibility of the professional trustee to ensure, as best possible, that the business of the underlying company is conducted in such a way, which will both protect and enhance the value of the shares of the company? The answer would appear to be “yes”, but only if the duties to enhance and preserve have not been excluded or limited by the terms of the trust. There is an obvious conflict here between commercial trust drafting and the trustee’s duty of prudence, which when applicable should be under regular review by the professional trustee in order to avoid any potential actions by the beneficiaries in the future.

The commercial reality: anti-Bartlett clauses

It is easy to advise that the professional trustee should insist on appointing a director in order to be in the best possible position to protect and represent the interests of the beneficiaries. However, in commercial reality such an appointment may not be acceptable, or indeed practical, for various reasons. For example, the trustees may hold the majority of shares of a family company, but the family wishes to continue to be represented on the Board in the absence of any trustee nominee or employee.

As a result, various ‘anti-Bartlett’ clauses have been prepared by trust draftsmen in order to protect the professional trustee. Such clauses state that the trustee shall not be bound to enquire or interfere in the business of an underlying company and furthermore that the trustee shall not be bound to obtain information regarding any underlying company. But do such exoneration clauses work? Again, there is a conflict between commercial trust drafting and the duty of prudence. The answer, as always, is a matter of degree and will very much depend on the individual circumstances of the case. To assist, it is worth bearing the following two points in mind:

·The professional trustee is not by analogy your ordinary prudent man and therefore there will be a rather high standard for the duty of prudence.

The majority of professional trustees have a dedicated team of specialist advisors covering every aspect of trust administration with ready access to all the latest changes in trust and tax legislation. Furthermore, the professional trust company charges significant fees for its professional services. Combined, is it not therefore more than reasonable for beneficiaries to have high expectations in relation to the protection, conduct and enhancement of the trust fund?

·Article 30(10) of the Law: “Nothing in the terms of a trust shall relieve, release or exonerate a trustee from liability for breach of trust arising from the trustee’s own fraud, wilful misconduct or gross negligence.”

In the Guernsey case (Channel Islands Court of Appeal) of Stuart-Hutcheson v Spread Trustee Company Limited [2002] it was established that there is a clear nexus between the professional trustee, the trust and any underlying company. The basis of the claim in this case centred on the alleged failure of the trustees to diversify the investments of the trust instead retaining them substantially in one stock. In order to investigate this claim the plaintiffs sought the release of various trust documents. It was held that the plaintiffs were entitled to the formal trust documents, the accounts of the trust and significantly disclosure of all accounts of an underlying company together with minutes of meetings of the shareholders and the directors. The shares of the company in question were held 50% by the trustees for this trust and 50% for a parallel trust, and all were managed and controlled in the same “stable”. Whilst the Court of Appeal did not expressly state that it found the underlying company to be the agent or “alter ego” of the trustee, it could be argued that it was trying to prevent trustees carrying on matters through underlying companies as a means of avoiding disclosure.

If beneficiaries are entitled to request disclosure of all accounts and minutes of meetings of an underlying company from the trustee then, by implication, it surely follows that the trustee must have a duty to obtain and consider such documentation. Should the professional trustee fail to do so (and thereby also fail to satisfy its KYC obligations) then it would be considered to have acted imprudently and to have committed a breach of trust. If such a breach of trust amounted to gross negligence then any exclusion or limitation of liabilities would be invalid.

In addition, would it not be highly inappropriate for the professional trustee to seek release from any losses to the trust fund by relying on a carefully drafted indemnity or anti-Bartlett clause(s)? What is clear is that the anti-Bartlett provisions will not protect a professional trustee against a successful claim for gross negligence and it is certainly persuasive that they may also fail to safeguard a professional trustee from the scrutiny of the court’s supervisory jurisdiction, which is considering the best interests of the beneficiaries and the reputation of the Island.

Conclusion

In summary, where a trustee holds the majority, or the entirety, of the shares in an underlying company then it should insist that an employee or nominee of the professional trust company be appointed as a director of the Board. Any person appointed must of course have the requisite skills and experience to fully understand the business the company is conducting. Should such appointment be impractical then it must be questionable whether it is safe for the professional trustee, in all cases, to do nothing and rely on the various blanket exoneration anti-Bartlett clauses hoping that the directors will act appropriately and the duty of prudence will not apply. This article acknowledges that this latter point is a fascinating legal grey area and will remain so until such time as the matter has been fully tried and tested before the Jersey court.

Should you have any queries and wish to have a confidential conversation then please do not hesitate to call or email.

Advocate Richard Pirie – 01534 601755 Email
David Dorgan – 01534 601757 Email
Carl O’Shea - 01534 601750 Email

THIS ARTICLE IS FOR INFORMATION PURPOSES ONLY AND NOT BY WAY OF LEGAL ADVICE. PROFESSIONAL LEGAL ADVICE SHOULD BE SOUGHT BEFORE ANY ACTION IS TAKEN.

Please click here to read PART II: Trusteeship and the Underlying Company- Directorship